Bankruptcy overview

Chapter 7 Bankruptcy

In a bankruptcy case under chapter 7, you file a petition asking the court to  discharge your debts.  The basic idea in a chapter 7 bankruptcy is to wipe out (discharge) your debts in  exchange for your giving up property, except for “exempt” property which the law allows you to keep. In most cases, all of your property will be exempt.  

In cases where there is non-exempt property, the bankruptcy trustee gathers and sells the debtor’s nonexempt assets and uses the proceeds of such assets to pay the creditors in accordance with the provisions of the Bankruptcy Code. In order to qualify to file a Chapter 7 bankruptcy, the debtor must pass a “means test.” This test prevents a debtor from filing if he has the ability to pay his debts. 

To qualify for Chapter 7 bankruptcy relief, you must satisfy the means test, which calculates your income and expenses. If your income is below the median household income for the state or it’s determined that you are not able to afford your debt based on your circumstances, your petition for Chapter 7 bankruptcy will be approved by the court.

Chapter 13 Bankruptcy

One major misconception is that in a Chapter 13 bankruptcy, you are required to pay off all your debts in installments over a period of three to five years under a court-approved repayment plan. The payment plan is approved by the court and does last for three to five years. However, the amount of the payment will vary depending upon your assets and income. Whether you file individually or jointly with your spouse, Chapter 13 bankruptcy gives you a fresh financial start oftentimes without forcing you to liquidate a vast majority of your property.

In a process that resembles loan consolidation, you make payments to a trustee who distributes the money to your creditors. This allows you to avoid further direct contact with your creditors. Once you have filed for bankruptcy, your creditors must immediately stop collections efforts.

The most important thing about a chapter 13 case is that it will allow you to keep valuable property--especially your home and car-which might otherwise be lost, if you can make the payments which the bankruptcy law requires to be made to your creditors.  In most cases, these payments will be at least as much as your regular monthly payments on your mortgage or car loan, with some extra payment to get caught up on the amount you have fallen behind.